Japanese automakers vulnerable to one-two punch of Iran war, yen rally

Japanese automakers vulnerable to one-two punch of Iran war, yen rally Skip Navigation Markets Business Investing Tech Politics & Policy Video Watchlist Investing Club PRO Livestream Menu Key Points Any potential further intervention by the Japan government in propping up the yen may affect the earnings outlook for Japanese automakers. However, the impact of the Middle East war may be a more pressing issue as the conflict drags on. Uncertainty in the Middle East acts as a swing factor for supply-chain logistics and raw material costs, according to Morningstar. In this article 7201.T-JP @JY26U Follow your favorite stocks CREATE FREE ACCOUNT A lot of cars are lined up for importing and exporting cars to the port. Kokouu | E+ | Getty Images Japanese automakers are looking vulnerable to fallout from the Iran war and any turnaround in the yen. Toyota , Honda and Nissan benefited in their most recent quarterly reports from a historically weak currency, with the first two upgrading their full-year forecasts and the latter seeing its first profit in about two years. But outside factors might not be so cooperative going forward. The U.S. Treasury and Japan's Ministry of Finance jointly coordinated a rare yen-buying intervention in early August in a historic move, after the currency fell to 40-year lows past 163 per dollar. Since Japanese automakers traditionally rely on a weak yen to make their exported vehicles cheaper and boost competitiveness in global markets, the actions raised cautionary flags. "If government intervention is to strengthen yen, this would be negative for Japanese automakers," said Vincent Sun, senior equity analyst at Morningstar. Stock Chart Icon Stock chart icon JPY A strong yen would force automakers to decide between raising prices in foreign markets, which could lead to market-share losses, or have their operating profit pressured by a lower yen value of foreign profits, Sun noted. "A 1% change in the yen generally affects Japanese automakers' operating profit by roughly 2%," said Masahiro Akita, senior analyst at Bernstein, "although sensitivity varies by company and can reach around 4% for some automakers." Analyst also reckon the ongoing Middle East conflict could cause problems, with Sun pointing to more supply chain disruptions and higher costs. The Strait of Hormuz and the Red Sea are crucial critical shipping lanes for Japanese automakers that rely on aluminum and petrochemicals like naphtha for car production. "The most significant headwind to automakers' earnings is the surge in raw material costs, which has intensified amid the ongoing Middle East conflict," Akita said. "Inflation across key inputs, including naphtha and resins linked to oil prices, memory chips, and industrial metals such as aluminum, copper, and steel, is having a broad-based negative impact on industry profitability," Akita added. Choose CNBC as your preferred source on Google and never miss a moment from the most trusted name in business news.